Gold has all but shaken out the most stern bulls during this 6-8 month consolidation after the August 2020 capitulation highs.
This is a pure chart post discussing what has happened in the past 20 years when similar technical setups have presented themselves.
Big Picture
There have been a few folks in the charting world that have stumbled on the following comparison. Though there are only 2 data points to compare, I find it interesting that both of the cups in the following picture have nearly the same length, about 8-9 years.
Following the 1996-2004 cup was a large consolidation phase in 2004, and again in 2005. Gold proceeded to rise over 300% from the 2004 highs to 2011. Can we get the same outcome again? That would put gold at over $8000/oz, which given history is not out of the question.
The 50 Week Moving Average
The 50 Week Moving Average (WMA in this post) is the guidepost for bull and bear markets. Retests on it have proven over time to be excellent buying locations. Combined with the Weekly Highest and Lowest Close (WHLC in this post), it is possibly to achieve pinpoint buying (and selling) locations in bull (or bear) markets for the yellow metal.
2002
The key ingredients I will present will show that ticks down of the 21 Week Lowest Close (WLC in this post) combined with a close beneath the 50 WMA provide near term oversold locations.
When the 200 Daily Moving Average (DMA in this post) is above the 50 WMA and the 50 WMA is rising, a weekly close below can invite a bottoming condition.
2003
In this instance, the weekly close ticked down the 21 WLC and closed beneath the 50 WMA, at the same time the 200 DMA is above the 50 WMA, and at the same time the 50 WMA is rising.
2004
This time, the weekly candle closed beneath the 50 WMA, but did not touch the 21 WLC. 2 weeks later the 21 WLC was touched, but not moved down (new lowest close). The pattern to start noticing is that the ending buying capitulation moves seem to last between 8-11 weeks. 2002 was 9 weeks of straight buying, 2003 was 11 weeks, and 2004 was 11 weeks again. Another pattern to notice is that the consolidation phase of that 9-11 week run takes about 4-6 months before finally reaching the 50 WMA and forming a bottom area. 2006
In this example it took a little longer for the consolidation phase to complete; a little less than 5 months. The first time that the price closed beneath the 50 WMA in that consolidation was also the first time that the the 21 WLC was moved down. The 200 DMA was above the 50 WMA, and the 50 WMA was increasing.
2007
This year was a bit tricky, since the world was in the midst of a global melt down. I compare March 2020 to October 2008, where both had a massive deflationary event and all assets were sold, including bonds and gold, in preference for US dollars. October 2008 was Lehman, March 2020 was the COVID-19 bottom. If you look at DXY during those times, there was a massive rush to dollars and everything else sold off to meet liabilities and margin requirements (and to just stand aside and exit the markets completely). 2011
This year looks similar to 2006, again we have a 9 week buying frenzy, but this time followed by a shortened 3-4 month consolidation. The close beneath the 50 WMA and the ticking down of the 21 WLC proved to be the bottom, and the price retraced back to the 21 Week Highest Close (21 WHC in this post), or the opposite side of the close channel in blue. This was also during the normal strong seasonality time for gold during the year from late December to late February (which we have had a hard time seeing this year in 2021 despite silver and platinum performing).
2013 - 2015 Bear Years
These two examples are just to show that the signal can work in the opposite direction, but likely with less reliability. 2016 to the right of the chart was a failure of this short trade.
2020
The current formation is very similar to the recent examples. There is a 9 week buying frenzy, but followed this time by an extended consolidation between 6-7 months. The first time in the consolidation that the weekly price closed beneath the 50 WMA also ticked down the 21 WLC. What Else? Looking back at the very first chart, I find it extremely normal to have this kind of consolidation after ending an 8-9 year cup formation and breaking the high placed back in September 2011. There are other oversold conditions to consider beyond the charts shown. XAUEUR - Weekly
Gold priced in euros is showing a rare oversold condition using the Larry Connors RSI. This is a not a well known indicator, but it has extreme value, described in his book "Short Term Trading Strategies that Work".
XAUAUD - Weekly
Similar to the 21 WHLC, I present the 55 WHLC (sticking to Fibonacci numbers) overlaid on the price chart. These are an even better signal when used correctly.
The Larry Connors RSI became oversold again last week at the close, and is possibly publishing a small bullish divergence with the price (price lower low, RSI higher low). The normal RSI-14 published a weekly oversold signal for the first time in nearly 8 years, very rare. Given the fact that XAUAUD has spend the majority of its time in the last several years in a bull market, this is a great signal, and hard to pass up.
10Y, 20Y, and 30Y Bonds
A lot of the recent slide in gold can be laid at the feet of 10Y and 30Y bonds. The spread between the 30Y and 2Y yields, and the 10Y and 2Y yields has dramatically risen in recent months as they have recovered from negative territory. This is similar to 1998, 2001, 2008. It is possible that 30Y bonds are due for a recovery bounce based on weekly oversold conditions, and seasonality. 30Y year bond futures and TLT are shown next.
Below I show the inverted 16 year seasonality for TNX (10Y yields) and TLT (20-30 bonds). Both show that on average Friday February 19 is a bottom area for 10Y, 20Y, and 30Y bonds.
To know more about Seasonality Trader, travel here. This next picture shows that the 10-2 spread has recovered with the S&P 500 as well as inflation expectation (symbol RINF in Trading View). The 2Y yield has steadily fallen since August after the massive plunge during the lows of the coronavirus.
What's Next? I would watch for rebounds this week and next, which can trigger even larger rebounds in silver. Silver has held its own in recent weeks even through the #silversqueeze earlier this month. Silver and gold bullion coins are still mostly out of stock, with maple leaves and eagles quickly sold out each time they become available again on major sites like SD Bullion or JM Bullion. I expect CPI to start catching up to PMI data in the following weeks.
In the back of my mind I am wondering also if we can see a continued rise in nominal yields with a corresponding rise in inflation. As long as inflation is greater than nominal yield, real yield = nominal - inflation < 0 which is bullish for gold. In the late 1970s after Nixon took the United States off the dollar/gold peg and closed the gold window, 10Y rates exceed 15%, but inflation was near 17% thereby creating a real yield of -2%. Gold soared 400%. Fast forward to today, we can still achieve real yields of -2%, and lower, as long as inflation out paces the 10Y rate.
This thread by none other than Michael Burry (The Big Short) is a good read if you have time. I will probably go through the wordpress link in the first tweet at some point.
I continue to build and hold a position in silver as it is slated to outperform gold in a big way over the coming months to years. Gold is the metals general (kind of like how Bitcoin is to Ethereum and Litecoin) and likes to charge ahead of the other precious and industrial metals in advance. Gold bottomed in late 2015 and had excellent years in 2018/2019. Silver and platinum made decade new lows in March 2020 and really got off to the races after the Gold:Silver and Gold:Platinum ratios reached historic highs.
- Cameron Osborne